1、Valuation and Capital Budgeting for the Levered FirmChapter 18Copyright 2010 by the McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/IrwinKey Concepts and SkillsoUnderstand the effects of leverage on the value created by a projectoBe able to apply Adjusted Present Value(APV),the Flows to Eq
2、uity(FTE)approach,and the WACC method for valuing projects with leverageChapter Outline18.1 Adjusted Present Value Approach18.2 Flows to Equity Approach18.3 Weighted Average Cost of Capital Method18.4 A Comparison of the APV,FTE,and WACC Approaches18.5 Capital Budgeting When the Discount Rate Must B
3、e Estimated18.6 APV Example18.7 Beta and Leverage18.1 Adjusted Present Value ApproachAPV=NPV+NPVFoThe value of a project to the firm can be thought of as the value of the project to an unlevered firm(NPV)plus the present value of the financing side effects(NPVF).oThere are four side effects of finan
4、cing:nThe Tax Subsidy to DebtnThe Costs of Issuing New SecuritiesnThe Costs of Financial DistressnSubsidies to Debt FinancingAPV Example 01 2 3 4$1,000$125$250$375$50050.56$)10.1(500$)10.1(375$)10.1(250$)10.1(125$000,1$%10432%10NPVNPVThe unlevered cost of equity is R0=10%:The project would be reject
5、ed by an all-equity firm:NPV bUnlevered firm)1(EquityDebt1CToIf the beta of the debt is non-zero,then:LCSBT)(1(Debtfirm Unleveredfirm UnleveredEquityBeta and Leverage:With Corporate TaxesSummaryoThe APV formula can be written as:oThe FTE formula can be written as:oThe WACC formula can be written asi
6、nvestmentInitialdebtof effects Additional)1(10tttRUCFAPVborrowedAmountinvestmentInitial)1(1ttStRLCFFTEinvestmentInitial)1(1ttWACCtWACCRUCFNPVSummaryoUse the WACC or FTE if the firms target debt to value ratio applies to the project over its life.WACC is the most commonly used by far.FTE has appeal f
7、or a firm deeply in debt.oThe APV method is used if the level of debt is known over the projects life.The APV method is frequently used for special situations like interest subsidies,LBOs,and leases.oThe beta of the equity of the firm is positively related to the leverage of the firm.Quick QuizoExplain how leverage impacts the value created by a potential project.oIdentify when it is appropriate to use the APV method?The FTE approach?The WACC approach?
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